The more customers want to invest in sustainable financial products and the more sustainable financial assets come onto the market, the more important it becomes for banks, fund operators, asset managers and investment consultants to distance themselves from the major financial service providers and rating agencies. In-house ESG scoring offers interesting opportunities, but requires good preparation and the support of suitable software technology, such as ACTICO Platform.
Sustainability is not just a trend that eases the conscience in the context of private consumption. It is also a success factor in corporate governance. ESG scoring has established itself as a measuring factor that combines sustainability factors relating to environmental (E) and social (S) aspects, as well as to decent corporate governance (G). The higher the rating, the lower the risk of having problems in any of these three areas.
Financial products with a high ESG rating can pay off for both private and institutional investors. This is because it has been shown that companies operating sustainably achieve returns that are at least the same as (if not better than) those of firms following conventional strategies. They are characterised by a lower susceptibility to risk, as reflected during the COVID-19 pandemic, for example, in the form of significantly lower price volatility.
Shortcomings of standard scores
The demand for financial investments with good ESG scores is correspondingly high. All major financial service providers and rating agencies now have ESG scores in their portfolios. They give ESG ratings to companies that are represented in globally relevant indices. In addition, they have numerous sustainability-oriented variants of traditional fund and stock indices, solely based on companies with good ESG scores.
However, the weightings and strategies of the individual providers differ. This sometimes leads to questionable results – for instance when, following the ‘best-in-class’ principle, ecologically dubious producers, such as a fast-fashion manufacturer or a car company that (still) mostly produces combustion vehicles, are also awarded good ESG scores. In such cases, the suspicion of arbitrariness and greenwashing quickly arises – regarding not only the individual company, but also the financial service provider awarding such ratings.
Another problem with the major service providers is that they do not consider firms that are too small or only regionally significant. But medium-sized companies make up a significant part of regional and national banks’ lending and borrowing business. Here too, ESG factors have proven themselves as a means of measuring the applicable risk – with the result that more sustainable companies are rewarded with lower financing costs.
Advantages of in-house sustainability assessment
Thus, the question arising more and more often for asset managers, fund operators and investment consultants is whether the scoring they offer their customers comes from external firms, meaning that they have no influence over it and that it only covers part of the market. Or whether it is not worthwhile to set up in-house ESG scoring, which builds trust with transparent comprehensible rules and makes it possible to consider companies and financial products that would otherwise slip through the cracks. This USP works both for investors with a focus on sustainable investments, and for small and medium-sized companies seeking cost-effective financing models.
Prerequisites for setting up ESG scoring
With the aid of flexible user-friendly software tools, a broad group of users can now create their own ESG scoring systems economically.
The biggest challenge on the path to in-house ESG scoring is data acquisition. This is often based on data supplied by various specialised service providers. One initial litmus test for suitable software is whether it supports integration of different data sources and formats, as well as internal and external databases and services. Automated analysis of unstructured data sources, such as companies’ sustainability reports, relevant forums, and the evaluation of social media channels using machine learning (ML) and artificial intelligence (AI), is also indispensable.
Another criterion is the question of how easily and flexibly the calculation models can be created and changed: Only by specialised developers? By the IT department? Or, at least in part, also by non-IT-experts? Especially when optimising and updating the models, or when creating variants based on customer-specific requirements, graphical programming interfaces that can be operated by the specialist departments’ staff bring significant advantages. Complex coordination processes between departmental and IT specialists become unnecessary, so the development processes run faster and more cost-effectively.
Last but not least, on all levels of such an application, it is important to provide user-friendly workflows that support users during data acquisition, data analysis, evaluation and reporting, that create transparency and that largely automate processes.
Example of a comprehensive platform
ACTICO Platform specialises in the automation of processes and the reduction of manual activities via the use of artificial intelligence (AI). More efficient workflows and user-friendly graphical tools reduce costs, both in setting up the system and in operation, so return on investment (ROI) is achieved in a relatively short time.
ACTICO Platform has all the tools necessary for meeting the aforementioned requirements. It helps data scientists to consolidate data from different sources and formats, so that it is available for the subsequent steps and can be easily integrated. The system is supplemented by a user-friendly user interface (UI) that enables any remaining information gaps to be filled manually.
The entire ESG scoring process is mapped in the context of decision modelling. This is where the business analysts and subject matter experts contribute their knowledge, so as to design suitable business rules for the ESG scoring: deciding on the evaluation concept, which criteria are included with which weighting, whether there are exclusion criteria and much more.
For this purpose, ACTICO Modeler is available: a graphical developer tool, with which subject matter experts create the rule set using graphical symbols and links. From this, ACTICO Modeler generates executable program code that can be integrated into the existing application landscape. This avoids complex coordination processes and long project times.
Wherever there has so far been no clear decision-making logic for data processing, machine learning comes into play. This can be used, for example, to generate relationships and decision-making paths from historical data, or to develop algorithms that use NLP to automatically extract information from texts. These are merged with the business rules in a ModelOps repository, so that they are available as decision automation components. Automatic documentation of start values, end values and changes to the rule set, as well as version and variant management and, last but not least, the output of Shapley values help to ensure the algorithms’ traceability as prescribed by the EU in the legal framework for AI.
When all products’ ESG scores are available, the financial consultant can suggest suitable investment assets based on the customer’s wishes. Decision applications, which are also available in the form of graphical user interfaces in the browser, make it easy for the user to store the selection rules and to package the results in visually appealing reporting. Here, the customer not only gets the ESG score listed, but also a visual evaluation that makes it easier for them to reach a decision. Disclosure of the influencing factors and their weighting increases transparency, along with the customer’s trust in their financial consultant.
With a suitable solution, banks, fund operators and financial service providers can, for an acceptable outlay, independently position themselves in the lucrative market for sustainable investments and financing, and thus stand out from the competition. ACTICO offers comprehensive technology that not only includes all the necessary tools, but also brings significant advantages when it comes to further automation of workflows.